1. Risk, Terminology, ERM

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1. Risk, Terminology, ERM

• Bus 200
• Introduction to Risk Management and Insurance
• Fall 2008
• Prof. Jin Park

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• Based on Uncertainty
• Uncertainty concerning the occurrence of a loss
• Based on Expected Value
• Deviation from expectation

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Pure vs. Speculative Risk
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Objective vs. Subjective Risk
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Fundamental vs. Particular Risk
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Perils

• (Immediate) Causes of loss
• Natural perils
• Acts of God
• Human perils
• Human acts, errors, and omissions, whether
  intentional or unintentional, causing a loss
• Economic perils
• Economic events or phenomenon causing a loss
• Insurable and Uninsurable perils

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Hazard

• A condition that creates or increases the chance
  of losses, their severity, or both.
• Physical hazard
• Moral hazard
• Morale hazard
• Legal hazard

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Types of Pure Risk

• Personal Risk
• Property Risk
• Direct Loss
• Indirect Loss
• Liability Risk

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Enterprise Risk Management

• Traditional risk management?
• Enterprise risk
• (Major) risks faced by an organization (or firm)
• Enterprise risk management
• The process (or discipline) by which an
  organization assess, controls, exploits,
  finances, and monitors risks from all sources for
  the purpose of minimizing the effects of risks on
  organizations value.

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Key ERM Risk Terms

• Strategic/Franchise Risk
• Legal/Compliance Risk
• Staffing/Organization Risk
• Credit Risk
• Market Risk
• Operational/Systems/Technology Risk
• Environmental Risk
• Sovereign Risk
• Financial/Documentation Reporting Risk
• Liquidity Risk

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Key Implementation Requirements
1. Provide leadership and set the tone from
the top
2. Allocate resources for enterprise risk
management
3. Establish vision and overall plan
4. Set milestones and individual
accountabilities
5. Establish risk measures and early warning
indicators
6. Integrate ERM into business planning and
operations
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Example Energy Industry
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Risk Management and Insurance the CRO
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